Daycare centers offer an intriguing business model with excellent profitability and more free time than many other industries. This leads to a relatively high demand for established daycare centers, which makes it easier for successful childcare center owners to sell. This review discusses how you can sell your daycare center for fair market value.
About The Daycare Industry
Day care centers, in particular day care centers for infants and children (rather than elderly adults), involve care for children of preschool age and below. Receiving approval to open a day care center involves an extensive process that many interested prospective buyers are not willing to go through. Like many industries, daycare centers were also strongly impacted by COVID. Overall, for successful owners, this is a fulfilling business model that provides nice work hours and excellent stability. Here are the most recent childcare and daycare industry numbers and projections:
- There are approximately 634,000 day care centers in the U.S.
- There was a 1.4% annual growth for the day care industry from 2018 to 2023
- The day care industry generates $60.8 billion in annual revenue
- The annual profit for the day care industry is $5.7 billion
- Experts predict a sizable increase in annual growth (1.1%) from 2023 to 2028
About Montessori Schools in The United States
Montessori schools provide services similar to daycare for toddlers and young children of the preschool and prekindergarten ages. However, Montessori schools also focus more on education and the development of real-world skills and knowledge. Many of these schools extend educational services through the 12th grade. As a general rule of thumb, Montessori schools usually sell for 35% of their annual sales plus inventory, 1.5 to 2 times their SDE, and 3 to 4 times their EBITDA.
How Much is My Daycare Center Worth?
Your broker may use a market-based valuation to determine the worth of your day care center. A market-based valuation uses your EBITDA and SDE and the application of rule of thumb data (acquisition multiples) before adjustments are applied. Here is the most recent rule of thumb data for the day care industry:
- Advertising agencies sold between 2.27 and 2.80 times the Seller’s Discretionary Earnings (SDE)
- Advertising agencies sold between 3.64 and 4.06 times the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
- Advertising agencies sold between 0.49 and 0.55 times the annual net sales
Adjustments may be applied depending on your reason for selling, growth potential, unique advantage, community reputation, and the quality of your workforce. We strongly recommend receiving a professional valuation from an experienced broker before you sell.
You should also check: How to Sell a Used Car Auto Dealership
How Can I Sell My Childcare or Daycare Center for Fair Market Value?
Once you determine your fair market value, you can form your sales approach and start the sales process. Here are the steps we typically recommend when selling a day care center:
- Plan your exit strategy
- Prepare your company documents
- Seek a buyer
- Negotiate and secure a deal with a signed letter of intent
- Close the sale
- Transfer ownership
- Start life’s next journey
1. Plan Your Exit Strategy
The first step to selling your daycare center is establishing your exit strategy. This, as discussed, involves your business valuation, which tells you how much you can expect reasonable buyers to offer. You, along with the assistance of your broker (and CPA and attorney, if applicable), can also develop your sales goals and timeline during this initial step.
2. Prepare Your Company Documents
You will also need to collect all documents that are needed to sell your daycare center. This helps you avoid setbacks and canceled deals later in the journey. Notably, you will need to collect the following documents:
- Tax returns (3+ years)
- Profit and loss statements
- Balance sheets
- Cash flow statements
- Insurance policy (copy)
- Building lease (copy)
- Property appraisal (if you own the property)
- List of employees
- List of attendees
3. Seek a Buyer via Confidential Marketing Channels
You must maintain the confidentiality of the sale when you find a buyer. Your broker helps ensure news of your sale is not leaked by only utilizing private marketing channels. When necessary, your broker may also use non-disclosure agreements (NDAs) and blind listings.
4. Negotiate and Secure a Deal With a Signed LOI
If you properly price your day care center and put together a well-developed sales memorandum, then you may receive multiple offers from qualified buyers. This gives you more leverage and allows you to negotiate the best deal possible. Your broker can help you with negotiations, which are often riddled with strong emotions and tough talks. Your broker should understand how to maintain professionalism while still looking out for your best interest. Ultimately, you will select the buyer that is best and have them sign a letter of intent (LOI) that highlights the purchase details.
5. Close The Sale
The sale closing begins with due diligence. This is a necessary stage for the buyer to confirm information about your day care center. Of course, this involves reviewing the documents you prepared in the second step (see above). They may also request to sit in on your day care to learn more about daily operations. Additional arrangements may be necessary as well, such as meeting with certain parents. Ultimately, the sale’s closing is scheduled after due diligence. This involves a review and signing of the purchase agreement and the confirmation of the payment.
6. Transfer Ownership
You may also transfer ownership entirely during closing, or it may continue beyond the closing visit. Notably, you will need to notify all parents that the sale is complete, update legal information (along with insurance policies, etc.), and provide the buyer with full access to the day care and all facilities, online systems, etc. In some cases, the buyer may continue to operate to ensure a smooth transition and ensure parents are comfortable with the ownership change.
7. Start Life’s Next Journey
After you complete the sale, you are free to start your next journey in life. For many sellers of a day care, this involves retirement. In other cases, they may pursue new business ventures that are important and interesting to them.
Sigma Mergers and Acquisitions Can Help You Sell Your Day Care Center
At Sigma Mergers and Acquisitions, we offer day care center owners a range of services including business valuations, consulting, and brokerage services. If you’re interested in learning about the value of your agency or selling it, schedule a consultation today to get started with a business valuation.
Scot Cockroft is the Owner & President of the #1 ranked Business Brokerage, Business sales and M&A firm in Texas. Scot has been named Named Deal Maker of the Year by Dallas Business Journal.
He is committed to a “different” type of business brokerage firm, one that is NOT about a sales pitch but, rather, results! In short, a business brokerage firm that is committed to performance-based compensation. Scot believes in these principles as well as a candid honesty with clients. His candid style often takes buyers and sellers by surprise, but is often what assures successful connections between the two.
Feel free to reach out!